Correlation Between Morningstar Defensive and Metropolitan West

Can any of the company-specific risk be diversified away by investing in both Morningstar Defensive and Metropolitan West at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Morningstar Defensive and Metropolitan West into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Morningstar Defensive Bond and Metropolitan West Ultra, you can compare the effects of market volatilities on Morningstar Defensive and Metropolitan West and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Morningstar Defensive with a short position of Metropolitan West. Check out your portfolio center. Please also check ongoing floating volatility patterns of Morningstar Defensive and Metropolitan West.

Diversification Opportunities for Morningstar Defensive and Metropolitan West

0.79

Correlation Coefficient

Morningstar Defensive  Metropolitan West

Poor diversification

The 3 months correlation between Morningstar and Metropolitan is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Morningstar Defensive Bond and Metropolitan West Ultra in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Metropolitan West Ultra and Morningstar Defensive is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Morningstar Defensive Bond are associated (or correlated) with Metropolitan West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Metropolitan West Ultra has no effect on the direction of Morningstar Defensive i.e., Morningstar Defensive and Metropolitan West go up and down completely randomly.

Pair Corralation between Morningstar Defensive and Metropolitan West

Assuming the 90 days horizon Morningstar Defensive Bond is expected to generate 1.22 times more return on investment than Metropolitan West. However, Morningstar Defensive is 1.22 times more volatile than Metropolitan West Ultra. It trades about 0.15 of its potential returns per unit of risk. Metropolitan West Ultra is currently generating about 0.0 per unit of risk. If you would invest  971.00  in Morningstar Defensive Bond on September 12, 2024 and sell it today you would earn a total of  4.00  from holding Morningstar Defensive Bond or generate 0.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Morningstar Defensive Bond  vs.  Metropolitan West Ultra

Morningstar Defensive

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Morningstar Defensive Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Morningstar Defensive is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Metropolitan West Ultra

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Metropolitan West Ultra has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Metropolitan West is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Morningstar Defensive and Metropolitan West

The main advantage of trading using opposite Morningstar Defensive and Metropolitan West positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Morningstar Defensive position performs unexpectedly, Metropolitan West can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Metropolitan West will offset losses from the drop in Metropolitan West's long position.

The idea behind Morningstar Defensive Bond and Metropolitan West Ultra pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.